Devina Mehra, founder and chairperson of First Global, has issued a stark warning to investors regarding the increasing proliferation of alternative investment products. Mehra cautioned against rushing into offerings such as alternative investment funds (AIFs), private equity, private credit, Gift City schemes, and venture capital, simply because they are presented as sophisticated or exclusive.
Alternative Doesn't Always Mean Different
Mehra highlights a critical distinction investors often miss: the difference between an underlying asset and the structure through which it's offered. For instance, a private equity fund ultimately invests in businesses, making it an equity investment, albeit in unlisted companies. Similarly, private credit remains a form of fixed-income exposure, despite its unique structure and risk profile.
This distinction is crucial because the label “alternative” often leads investors to falsely assume automatic diversification. “Many times what are touted as alternative assets, from private equity to private credit, from AIFs to Gift City schemes, are just a riskier version of what you already hold,” Mehra stated.
The Liquidity Challenge
One of the most significant risks associated with many private-market investments is their inherent lack of liquidity. Unlike publicly traded securities, which can be bought and sold relatively easily, exiting an unlisted investment can be challenging. Investors might have to wait for a fund to provide an exit or find another buyer, which can be particularly difficult during periods of market volatility or stress.
Higher Returns Come With Higher, Hidden Risks
Mehra urged investors not to focus solely on the high returns often showcased by alternative investment products. She pointed out that historical returns from specific private-market strategies are not guaranteed to be replicated, especially as more capital flows into similar opportunities.
Private credit, for example, can carry risks that are not immediately apparent from headline yields. If credit conditions worsen, borrowers may struggle, and lenders might discover that the premium earned does not adequately compensate for the underlying risks. The complex nature of these products further complicates an investor's ability to truly assess what they own.
“Remember the golden rule of not buying something you do not fully understand. Be super careful of exotica,” Mehra advised.
Ultimately, Mehra's message is not to reject alternative investments entirely but to encourage thorough due diligence. Investors must understand the underlying asset, its risks, liquidity, associated costs, and the exit mechanism, rather than being swayed by a product’s perceived exclusivity or sophistication.